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Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
---|---|---|---|---|---|
Global Market | LSE:GMC | London | Ordinary Share | KYG3927E1145 | ORD USD0.0002 (DI) |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 50.00 | 0.00 | 01:00:00 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
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0 | 0 | N/A | 0 |
TIDMGMC
RNS Number : 9557O
Global Market Group Ltd
02 June 2015
2 June 2015 Global Market Group Limited ("Global Market" or the "Group") Global Market Group announces Final Results for the year ended 31 December 2014 Global Market Group Limited (AIM: GMC) ("GMG" or the "Company"), a leading manufacturer-to-business ("M2B") online marketplace that connects high-quality manufacturers in China with buyers from all over the world announces today its final results for the year ended 31 December 2014. Highlights Gross group revenue increased by 13.9% year-on-year to US$29.27 million for the full year ended 31 December 2014. Revenue for the M2B segment increased by 4.4% year-on-year to US$26.01 million, leading to a return to profit for the segment, with net income of US$2.47 million. Over 30,000 manufacturers were vetted by the Company as at 31 December 2014, with online product offerings for the M2B segment as at 31 December 2014 increasing 40.6% year-on-year to 4.5 million. ARPU (M2B segment) for the full year ended 31 December 2014 increased 3.7% year-on-year to around US$10,399. The number of package service subscribers decreased as some manufacturers chose the Free GMC Scheme of basic listing services. However, registered buyers increased 15% year-on-year to 1.36 million as at 31 December 2014 (2013: 1.18 million). Small order transactions, which is an important value-added service of the M2B segment, started trial operations in the final quarter of 2014 and is targeted to officially launch in Q3 2015.The Company anticipates that this will represent an additional revenue stream for the business. The Company invested approximately US$12.9 million into its M2C e-commerce segment, FeiFei.com, for the full year ended 31 December 2014. Revenue for the M2C segment increased by 311.5% year-on-year to US$3.26 million, however the segment overall recorded a net loss of US$9.66 million. In the second quarter of 2015, the Company started to explore new business models and has capped its monthly expenses for the M2C segment at around $0.06 million. FeiFei will adapt its business model from a M2C to M2B2C model and focus more on serving the manufacturer. China's national standard of high-quality e-commerce manufacturers, issued by AQSIQ (General Administration of Quality Supervision, Inspection and Quarantine of the People's Republic of China) and SAC (Standardization Administration of the People's Republic of China), on 31 December 2014 uses the selection criteria of the GMC standard first established by GMG. Currently, this national standard this is the only official evaluation criteria for e-commerce suppliers vetting high quality manufacturers. The benefit to the Company is that any manufacturer qualifying for the GMC standard also qualifies for the national standard. The Company is leading the way in integrating domestic Chinese manufacturers into the fast-growing e-commerce economy. The Company was awarded as one of the 2015 Best Cross-border Enterprises at the China E-commerce Innovation and Development Summit held in Guiyang, Guizhou province, in May 2015. This Summit is under the guidance of the ministries and commissions under the State Council of People's Republic of China, such as the National Development and Reform Commission, General Administration of Customs, State Administration for Industry & Commerce, AQSIQ and SAC. The financial information in this announcement is derived from the Company's audited financial statements for the year ended 31 December 2014, a copy of which is available on the Company's website: www.globalmarket.com. For further information, please visit www.globalmarket.com or contact: Global Market Group Limited Tel: +86 (20) 8600 2299 David Ling/Cheandy Hu/Mophy Fan Grant Thornton UK LLP (Nominated Tel: +44 (0)20 7383 5100 Adviser) Philip Secrett/ Maureen Tai/ Jen Clarke Westhouse Securities Limited Tel:+44 (0)20 7601 6114 (Broker) Martin Davison CHAIRMAN'S STATEMENT I am pleased to present the final results of Global Market Group Limited for the year ended 31 December 2014. Business review During the two-year strategic adjustment period running until the end of 2014, over 30,000 manufacturers have been vetted by the Company and the M2B segment has returned to profit, although the number of package service subscribers has decreased as a result of the deliberate shift in the marketing strategy of the Company to offer some manufacturers the Free GMC Scheme which provides basic listing services for free. As a result of the Free GMC Scheme, online product offerings for the M2B segment at 31 December 2014 increased by 40.6% year-on-year to 4.5 million. At the same time, average revenue per user (or "ARPU") for the M2B segment for the full year ended 31 December 2014 increased by 3.7% year-on-year to around US$10,399, while deferred revenue decreased slightly by 2.6% year-on-year to US$15.6 million. Small order transactions or "Snowball" as it will be branded, which is an important value-added service of the M2B segment and only open to paying subscribers at this stage, started trial operations in Q4 2014. As it develops, Snowball should help generate advertising service revenue and we believe that it is through offering such value-added services that www.globalmarket.com will gradually transform from being a cross-border information publishing platform into a cross-border transactional e-commerce platform. The goal of introducing small order transactions is to integrate the global supply chain by incorporating logistics, payment, insurance, customs clearance and other services to create a one-stop solution for the Company's manufacturer customers. Developing a cross-border transactional e-commerce website will help to enhance cross-border knowledge and small order transactions will help both manufacturers who are inexperienced in conducting cross-border business and worldwide online retailers who will be able to complete direct sales from Chinese manufacturers. Small order transactions will also help our over 30,000 domestic and accredited manufacturers build up their own brands and sell directly to overseas online retailers through the wholesale or "dropship" model. The wholesale model will allow online retailers to buy small quantities directly from Chinese manufacturers. The "dropship" model will enable online retailers to sell to consumers without owning the inventories. Once an online retailer receives an order from a consumer, the retailer will place that order with the manufacturer who will ship the required product directly to that consumer. It will reduce costly elements of the supply chain, build up trust with GMG, and help small order online retailers offer more competitively priced, good quality products and better service standards and guarantees. Over time, we aim to build up global e-commerce alliances with worldwide marketplaces. The trial operation of small order transactions started in the final quarter of 2014 and some of the participating manufacturers successfully received overseas orders during the trial operation period. The initial investment has been small but the Company intends to dedicate further resources as this new business line expands. At present, the Company charges no commission on the orders but as the initiative develops, it stands to benefit from advertising, financing and global supply chain services as all the orders and payments will happen on the www.globalmarket.com platform. In 2014, the Company, through FeiFei.com, explored the Chinese M2C business model and gained a lot of experience of the domestic online transaction market. It became apparent over the course of 2014 that the end-consumer focused model faces excessive competition in China and therefore, the Company's intention is to adapt the focus of FeiFei's operations going forward. Of the US$12.9 million investment spent on FeiFei for the full year ended 31 December 2014, the majority was on salaries, logistics, marketing and promotions. Around US$5 million advertising resources, which is part of Guangzhou Daily's investment, remained in FeiFei as at 31 December 2014. With the continuing support of Guangzhou Daily, FeiFei will adapt its business model from a M2C to M2B2C model and focus more on serving the manufacturer, improving the user experience and building up a service which will address the whole supply chain. By building up the e-commerce alliance, FeiFei will help GMC manufacturers establish their own brands and sell high quality products to Chinese consumers through tens of millions of the domestic online retailers. In this way, FeiFei will better focus on building up GMC trust system, enhancing user experience and utilizing the resources of manufacturers rather than investing in marketing to end consumers. FeiFei will aim to become a leading cross-border transaction platform in China's domestic market, linking 30,000 GMC manufacturers (from China and possibly from overseas) with tens of millions of China's online retailers by building up China's largest e-commerce alliance. M2B and FeiFei will share the GMC brand, the database of over 30,000 accredited manufacturers and the IT transaction platform. However, FeiFei.com will focus on selling to China's domestic market, while www.globalmarket.com will focus on the overseas market. Financial review Revenues for the year ended 31 December 2014 rose by 13.9% to US$29.27million (2013: US$25.71million). The net loss of US$7.44 million arose after accounting for an investment of around US$12.9 million in FeiFei. Sales and marketing expenses (excluding share-based compensation expenses of US$0.27 million) decreased by 30.2% to US$15.98million (2013: US$22.89million). Heavy investment in FeiFei resulted in an increase in sales and marketing expenses, but the decline in sales salaries across all business segments helped minimise the impact of the Company's investment in FeiFei. The M2B segment revenue increased by 4.4% year-on-year to US$26.01 million, returning to profit with net income of US$2.47 million. Revenue for the M2C segment increased by 311.5% year-on-year to US$3.26 million, however the segment overall recorded a net loss of US$9.66 million. General and administrative expenses (excluding share-based compensation expenses of US$0.20 million) increased by 43.7% to US$11.15 million during the year (2013: US$7.76 million), largely attributable to the investment in FeiFei. In the second quarter of 2015, the Company started to explore new business models and has capped its monthly expenses for the M2C segment at around $0.06 million, mainly for salaries, administration, rental and marketing. Outlook Against the backdrop of weak global trade and declining exports from both established economies and emerging market economies, China's exports still maintained an increasing momentum in the first half of 2015.It is expected by the Ministry of Commerce of People's Republic of China that the foreign trade situation in the second half of 2015 will be better than the first half of the year and that foreign trade for the whole year will finish on a rising trend. We learned a lot in 2014 about the rapidly-changing and highly-competitive domestic e-commerce market and in 2015 we have begun to adapt our business model to suit our unique M2B and overseas buyer assets and capabilities.2015 will be the most important year for China cross-border e-commerce because it is developing rapidly and the Chinese government, from central government to local governments, has shown great support for its development. We are confident that we are ready to take on the challenges and to make the most of the market opportunities. David Ling Chairman and CEO 2 June 2015 GLOBAL MARKET GROUP LIMITED CONSOLIDATED BALANCE SHEETS (Amounts in thousands of U.S. Dollars ("US$") except for number of shares and per share data) As of As of December December Notes 31, 2014 31, 2013 ------ ---------- ---------- US$ US$ ASSETS Current assets: Cash and cash equivalents 11,271 17,519 Inventory 45 188 Accounts receivable (net of allowance of nil and US$44 for December 31, 2013 and 2014, respectively) 4 1,082 362 Prepayments and other current assets 5 5,310 4,743 ---------- ---------- Total current assets 17,708 22,812 ---------- ---------- Non-current assets: Property and equipment, net 6 4,922 4,415 Goodwill 7 6,508 6,510 Other intangible assets, net 7 4,550 4,408 Other non-current assets 8 3,856 3,663 ---------- ---------- Total non-current assets 19,836 18,996 ---------- ---------- TOTAL ASSETS 37,544 41,808 ========== ========== The accompanying notes are an integral part of the consolidated financial statements. GLOBAL MARKET GROUP LIMITED CONSOLIDATED BALANCE SHEETS (continued) (Amounts in thousands of U.S. Dollars ("US$") except for number of shares and per share data) As of As of December December Notes 31, 2014 31, 2013 ------ ---------- ---------- US$ US$ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable 479 398 Deferred revenue 15,607 16,018 Accrued expenses and other liabilities (including accrued expenses and other current liabilities of the variable interest entity without recourse to Global Market Group Limited of US$18 and US$9 as of December 31, 2013 and 2014, respectively) 9 6,600 7,307 Income tax payable 78 28 ---------- ---------- Total current liabilities 22,764 23,751 ---------- ---------- Non-current liabilities: Deferred tax liabilities, non-current 12 101 98 Unrecognized tax benefits 12 2 2 ---------- ---------- Total non-current liabilities 103 100 ---------- ---------- Total liabilities 22,867 23,851 ---------- ---------- Commitments and contingencies 17 Mezzanine Equity Contingently redeemable noncontrolling interests 10 6,979 - Shareholders' Equity: Ordinary shares (par value of US$0.0002 per share; 250,000,000 and 250,000,000 shares authorized as of December 31, 2013 and 2014, respectively; 97,824,935 and 93,321,935 shares issued and outstanding as at December 31, 2013 and 2014, respectively.) 11 19 20 Additional paid-in capital 44,510 44,593 Accumulated deficit (36,821) (26,714) Accumulated other comprehensive (loss) income 11 (10) 58 ---------- ---------- Total shareholders' equity 7,698 17,957 ---------- ---------- Total liabilities and shareholders' equity 37,544 41,808 ========== ========== The accompanying notes are an integral part of the consolidated financial statements. GLOBAL MARKET GROUP LIMITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Amounts in thousands of U.S. Dollars ("US$") except for number of shares and per share data) For the years ended December 31, ------------------------ Notes 2014 2013 ------ ----------- ----------- US$ US$ Revenues 18 29,271 25,709 Cost of revenues (6,725) (3,930) ----------- ----------- Gross profit 22,546 21,779 Operating expenses: Fulfillment (3,235) (931) Selling and marketing expenses (15,978) (22,893) General and administrative expenses (11,152) (7,759) ----------- ----------- Operating loss (7,819) (9,804) ----------- ----------- Other income 35 21 Foreign exchange gain 59 64 Changes in fair value of derivative financial liabilities 13 65 Interest income 285 303 ----------- ----------- Loss before income tax (7,427) (9,351) Income tax expense 12 (15) (197) ----------- ----------- Net loss (7,442) (9,548) Less: Net loss attributable to contingently redeemable noncontrolling interests 985 - Accretion of contingently redeemable noncontrolling interests 10 (1,468) - ----------- ----------- Net loss attributable to Global Market Group Limited's ordinary shareholders (7,925) (9,548) =========== =========== Other comprehensive (loss) income, net of tax Foreign currency translation adjustment (68) 204 ----------- ----------- Other comprehensive (loss) income, net of tax (68) 204 ----------- ----------- Comprehensive loss attributable to Global Market Group Limited's ordinary shareholders (7,993) (9,344) =========== =========== Earnings per share: Basic 19 (0.09) (0.10) Diluted 19 (0.09) (0.10) Weighted average number of ordinary shares in computing: Basic 19 93,667,371 97,801,236 Diluted 19 93,667,371 97,801,236 The accompanying notes are an integral part of the consolidated financial statements. GLOBAL MARKET GROUP LIMITED CONSOLIDATED STATEMENT OF CASH FLOWS (Amounts in thousands of U.S. Dollars ("US$") except for number of shares and per share data) For the years ended December 31, 2014 2013 ---------- ---------- US$ US$ Cash flows from operating activities Net loss (7,442) (9,548) Adjustments to reconcile income from continuing operations to net cash generated from operating activities: Share-based payment 479 761 Changes in fair value of derivative liabilities (13) (65) Depreciation of property and equipment 479 421 Amortization of other intangible assets 987 491 Allowance for doubtful accounts 44 - Write-off of obsolete inventories 117 - Loss on disposal of property and equipment 174 14 Deferred income tax expense 3 200 Unrealized foreign exchange (gain) loss (68) 204 Changes in operating assets and liabilities: Decrease (increase) in inventory 26 (188) (Decrease) increase in accounts receivable (764) 1,466 Increase in prepayments and other current assets (567) (226) (Increase) decrease in other non-current assets (770) 7 Increase in accounts payable 81 398 (Decrease) increase in deferred revenue (411) 5,531 Increase in income tax payable 50 24 (Decrease) increase in accrued expenses and other current liabilities (694) 2,708 Decrease in unrecognized tax benefits - (28) ---------- ---------- Net cash (used in) generated from operating activities (8,289) 2,170 ---------- ---------- Cash flows from investing activities Acquisition of property and equipment (1,174) (3,048) Acquisition of intangible assets (1,144) (3,183) Loans to employees (1,326) (1,856) Repayment of loans to employees 1,903 961 ---------- ---------- Net cash used in investing activities (1,741) (7,126) ---------- ---------- The accompanying notes are an integral part of the consolidated financial statements. GLOBAL MARKET GROUP LIMITED CONSOLIDATED STATEMENT OF CASH FLOWS (continued) (Amounts in thousands of U.S. Dollars ("US$") except for number of shares and per share data) For the years ended December 31, ---------------------- 2014 2013 ---------- ---------- US$ US$ Cash flows from financing activities Repurchase of ordinary share (2,183) - Payment of deemed dividend to controlling shareholder (562) - Proceeds from issuance of contingently redeemable noncontrolling interests 6,496 - ---------- ---------- Net cash generated from financing activities 3,751 - ---------- ---------- Exchange rate effect on cash and cash equivalent 31 (5) ---------- ---------- Net decrease in cash and cash equivalents (6,248) (4,961) Cash and cash equivalents, beginning of the period 17,519 22,480 ---------- ---------- Cash and cash equivalents, end of the period 11,271 17,519 ========== ========== Supplemental schedule of cash flows information: Income tax paid - - The accompanying notes are an integral part of the consolidated financial statements. GLOBAL MARKET GROUP LIMITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Amounts in thousands of U.S. Dollars ("US$") except for number of shares and per share data) Total Global Market Group Limited's Equity --------------------------------------------------------------------------------- Accumulated other comprehensive Ordinary shares income/(loss) ---------------------- ----------- ------------ -------------- -------------- Additional Total Number paid-in Accumulated shareholders' of shares Amounts capital deficit equity ------------ -------- ----------- ------------ -------------- -------------- Balance as of 1 January 2013 97,774,935 20 43,813 (17,166) (146) 26,521 Net loss - - - (9,548) - (9,548) Other comprehensive income - - - - 204 204 Share-based compensation - - 748 - - 748 Issuance of ordinary shares 50,000 - 32 - - 32 Balance as of 31 December , 2013 97,824,935 20 44,593 (26,714) 58 17,957 ============ ======== =========== ============ ============== ============== Net loss - - - (7,442) - (7,442) Other comprehensive income: - - - - (68) (68) Net loss attributable to contingently redeemable noncontrolling interests - - - 985 - 985 Accretion of contingently redeemable non-controlling interest - - - (1,468) - (1,468) Share-based compensation - - 479 - - 479 Deemed dividend to controlling shareholder - - (562) - - (562) Repurchase of ordinary shares (4,503,000) (1) - (2,182) - (2,183) Balance as of 31 December 2014 93,321,935 19 44,510 (36,821) (10) 7,698 ============ ======== =========== ============ ============== ============== The accompanying notes are an integral part of the consolidated financial statements.
GLOBAL MARKET GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. Dollars ("US$") and in thousands of Renminbi ("RMB") except for number of shares and per share data)
1.ORGANISATION AND BASIS OF PRESENTATION
The Company was incorporated under the laws of the Cayman Islands on May 13, 2002. The accompanying consolidated financial statements include the financial statements of the Company, its controlled subsidiaries and VIE (hereinafter subsidiaries and VIE are collectively referred to as "subsidiaries" unless stated otherwise). The Company and its subsidiaries are collectively referred to as the "Group". The Group is principally engaged in provision of manufacturer-to-business ("M2B") e-commerce services and manufacturer-to-consumer ("M2C") e-commerce services. The Company does not conduct any substantive operations on its own but instead conducts its business operations through its subsidiaries and VIE.
Global Market Group (Guangzhou) Co., Ltd ("Global Market Guangzhou"), a PRC entity wholly owned by the Company entered into a series of contractual arrangements ("VIE Arrangements" which are more fully described below) with Guangzhou Shen Long Computer Technology Co. Ltd ("Guangzhou Shen Long"), a PRC entity wholly owned by Mr. Weijia Pan and Mr. Weinian Pan (the "Pan Brothers") whose principal business is the provision of internet content services, whereby Global Market Guangzhou obtained effective control over the Guangzhou Shen Long through its ability to exercise all the rights of Guangzhou Shen Long, the rights to absorb substantially all of the economic residual benefits and the obligation to fund all of the expected losses of the Guangzhou Shen Long. In accordance with Accounting Standards Codification ("ASC") topic 810 ("ASC 810"), "Consolidation", the Company, through Global Market Guangzhou, consolidates the operating results of Guangzhou Shen Long. The reason the Group entered into these VIE Arrangements is due to the fact that PRC Laws and regulations (i) prohibit direct foreign control in certain industries such as internet services in which the Group operates and (ii) restrict an offshore company controlled or established by a PRC enterprise or natural person to acquire its PRC affiliates. As a result, in an effort to ensure that the Group is not violating such PRC Laws or regulations, it structured its legal organization using the aforementioned VIE arrangements.
VIE Arrangements
The significant terms of the VIE Arrangement are listed below:
(i)Exclusive Management, Technical Consultancy and Permission Agreements
Global Market Guangzhou provides the following exclusive management, technical consultancy and permission services to Guangzhou Shen Long (hereafter, the "Contractual Services"): i) daily management and operating services; ii) technical supports; and iii) permission to use trademark and logo owned by Global Market Guangzhou.
Global Market Guangzhou has the right to charge an amount equal to Guangzhou Shen Long's total revenue less cost and expenses for the Contractual Services. Global Market Guangzhou also has the unilateral discretion in setting or adjusting the charge fees for the Contractual Services.
Guangzhou Shen Long shall be operated and controlled by an operating committee which is solely controlled by Global Market Guangzhou. The operating committee has the right to assess and approve the annual budget of Guangzhou Shen Long.
Global Market Guangzhou shall be obligated to provide financial support to Guangzhou Shen Long in the event Guangzhou Shen Long incurs losses.
Unless Global Market Guangzhou terminates the agreement, the exclusive management, technology consultancy and permission agreement will remain effective until the dissolution of Global Market Guangzhou in accordance with the applicable PRC laws.
(ii)Exclusive Call Option Agreements
Global Market Guangzhou has the exclusive right to acquire from the legal shareholders (i.e. Pan Brothers) their partial or entire equity interests in Guangzhou Shen Long, or all the assets of Guangzhou Shen Long, at a price equivalent to the registered capital of Guangzhou Shen Long or at a lower cost as permitted by applicable PRC laws and regulations when and if PRC laws permit such a transaction.
Guangzhou Shen Long will not enter into any transaction that may materially affect its net assets or operations without the prior written consent of Global Market Guangzhou.
The legal shareholders of Guangzhou Shen Long, will not transfer, sell, pledge or dispose of their equity interest in Guangzhou Shen Long without the prior written consent of Global Market Guangzhou.
Guangzhou Shen Long will not distribute any dividend without the prior consent of Global Market Guangzhou.
The exclusive option agreement will remain effective until the exclusive option is exercised to purchase the entire equity interest of Guangzhou Shen Long.
(iii)Equity Pledge Agreements
The legal shareholders of Guangzhou Shen Long have pledged their equity interests in Guangzhou Shen Long to Global Market Guangzhou to secure the payment obligations of Guangzhou Shen Long under the Contractual Services agreement.
Any dividends or distributions received by the legal shareholders from Guangzhou Shen Long shall be paid to Global Market Guangzhou, net of any tax.
Unless Global Market Guangzhou terminates the agreement, the equity pledge agreement will remain effective until (i) Guangzhou Shen Long fulfills all the obligations prescribed in the exclusive call option agreements, the exclusive management, technology consultancy and permission agreement or (ii) Global Market Guangzhou acquires the entire equity interest of Guangzhou Shen Long.
(iv)Powers of Attorney
The legal shareholders have executed a power of attorney in September 2010 to irrevocably grant to Global Market Guangzhou or its designee the power of attorney to exercise all of shareholders' rights, including the right to appoint and elect board members and senior management members, as well as other voting rights. The power of attorney is effective for 20 years and will automatically extend for next 1 year when expire.
Risks in relation to the VIE Arrangement
In the opinion of management, (i) the ownership structure of the Company, and the VIE are in compliance with existing PRC laws and regulations; (ii) the contractual arrangements with the VIE and its shareholder are valid and binding, and will not result in any violation of PRC laws or regulations currently in effect; and (iii) the Company's business operations are in compliance with existing PRC laws and regulations in all material respects.
However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, the Company cannot be assured that PRC regulatory authorities will not ultimately take a contrary view to its opinion. If the current ownership structure of the Company and its contractual arrangements with VIE are found to be in violation of any existing or future PRC laws and regulations, the Company may be required to restructure its ownership structure and operations in the PRC to comply with the changing and new PRC laws and regulations. In the opinion of management, the likelihood of loss in respect of the Company's current ownership structure or the contractual arrangements with VIE is remote based on current facts and circumstances.
The Company's ability to control the VIE also depends on the power of attorney Global Market Guangzhou has to vote on all matters requiring shareholder approval in the VIE. As noted above, the Company believes this power of attorney is legally enforceable but may not be as effective as direct equity ownership.
In addition, if the legal structure and contractual arrangements were found to be in violation of any existing PRC laws and regulations, the Group may be subject to fines or other actions.
The carrying amounts and classifications of the assets and liabilities of the VIE are as follows:
As at December 31, -------------------- 2014 2013 US$ US$ ASSETS Current assets: Cash 29 8 Accounts receivable 2 - Prepayments and other current assets 404 373 --------- --------- Total current assets 435 381 --------- --------- Total assets 435 381 ========= ========= LIABILITIES Current liabilities: Accrued expenses and other liabilities 9 18 --------- --------- Total current liabilities 9 18 --------- --------- Non-current liabilities: Deferred tax liabilities, non-current 41 24 --------- --------- Total liabilities 41 42 ========= =========
The financial performance and cash flows of the VIE are as follows:
For the years ended December 31, ------------------------------- 2014 2013 US$ US$ Net revenues 270 131 =============== ============== Net income (loss) 50 (15) =============== ============== Net cash provided generated from (used in) operating activities 23 3 =============== ============== Net cash provided by investing activities - - =============== ============== Net cash provided by financing activities - - =============== ==============
There are no consolidated VIE's assets that are collateral for the VIE's obligations and which can only be used to settle the VIE's obligations.
Creditors of the VIE have no recourse to the general credit of Global Market Guangzhou, which is the primary beneficiary of the VIE.
Details of the Company's subsidiaries and variable interest entity as at December 31, 2014 are set out as follows:
Percentage Date of Place of of ownership Principal Company Establishment establishment by the Company activities ---------------------------- --------------- --------------- ---------------- ------------------ Global Market Group June 14, Hong Kong 100% Investment (Asia) Limited ("Global 2000 holding and Market Asia") M2B e-commerce services Global Market Group September PRC 100% M2B e-commerce (Guangzhou) Co., 6, 2002 services Ltd ("Global Market Guangzhou") Shenzhen Long Mei June 5, PRC 100% M2B e-commerce Network Technology services Co., Ltd ("Shenzhen Long Mei") 2008 Shenzhen Global Market September PRC 100% M2B e-commerce Information Technology 7, services Co., Ltd ("Shenzhen Global Market") 2009 Suzhou Long Mei Information April 9, PRC 100% M2B e-commerce Technology Co., Ltd. 2010 services ("Suzhou Long Mei") Guangzhou Long Tian July 27, PRC 100% M2B e-commerce Software Technology 2011 services Co., Ltd ("Guangzhou Long Tian) Guangzhou Longyuan March 28, PRC 100% M2B e-commerce Software Technology 2013 services Co., Ltd. ("Guangzhou Long Yuan") Guangzhou Longxiang September PRC 100% Logistic services Supply Chain Management 19, 2014 Co., Ltd GMCpay Limited ("GMCpay") June 10, BVI 100% Investment 2013 holding and M2B e-commerce services Feifei Group Limited(BVI) June 19, BVI 100% Investment ("Feifei Group Ltd") 2013 holding and M2C e-commerce services Guangzhou Feifei November PRC 100% M2C e-commerce Information Technology 29, services Co., Ltd ("Guangzhou Feifei") 2013 Guangzhou Long Fei November PRC 89.47% M2C e-commerce Software Technology 28, services Co., Ltd. ("Guangzhou Long Fei") 2012 Suzhou Feifei Software August 19, PRC 100% M2C e-commerce Technology Co., Ltd services 2014 Global Pearl Group July 31, BVI 100% Investment Limited ("Global 2014 holding Pearl") Guangzhou Longzhu August 22, PRC 100% Investment Software Technology holding Co., Ltd ("Guangzhou Longfei") 2014 Guangzhou Zhaixing October 14, PRC 100% Investment Information technology holding Co., Ltd ("Guangzhou Zhaixing") 2014 Guangzhou Shen Long June 23, PRC Nil Internet Content Computer Technology 2003 Provision Co., Ltd. ("Guangzhou ("ICP") services Shen Long")
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and use of estimation
The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions reflected in the Group's financial statements include, but are not limited to, revenue recognition, allowance for doubtful accounts, inventory write-down, useful lives of property and equipment, impairment of property and equipment, intangible assets and goodwill, realization of deferred tax assets, share-based compensation and consolidation of variable interest entity. Actual results could materially differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation.
.
Foreign Currency
In accordance with ASC 830-10, "Foreign Currency Matters: Overall", the functional currencies of the Company, Feifei International Ltd., and Feifei Group Ltd., are determined to be the United States dollars ("US$"), The functional currency of Global Market Asia is determined to be Hong Kong dollars ("HK$"); and the functional currency of the Company's PRC subsidiaries is the Chinese Renminbi ("RMB"). The Company uses the US$ as its reporting currency. The financial statements of foreign subsidiaries are translated to U.S. dollars at the end-of-period exchange rates for assets and liabilities and an average exchange rate for each period for revenues and expenses. The resulting translation gains (losses) are recorded in accumulated other comprehensive income (loss) as a component of shareholders' equity.
Transactions denominated in foreign currencies are remeasured into the functional currency at the exchange rates prevailing on the transaction dates. Foreign currency denominated financial assets and liabilities are remeasured at the balance sheet date exchange rate. Exchange gains and losses are included in the consolidated statements of comprehensive income.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and all highly liquid investments purchased with original maturities of three months or less at the date of purchase.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are carried at net realizable value. An allowance for doubtful accounts are recorded when collection is no longer probable. In evaluating the collectability of receivable balances, the Group considers factors such as customer circumstances or age of the receivable. Accounts receivable are written off after all collection efforts have ceased. Collateral is not typically required, nor is interest charged on accounts receivables.
Inventories
Inventories, consisting of products available for sale, are accounted for using the first-in first-out method, and are valued at the lower of cost or market. This valuation requires the Company to make judgments, based on currently available information, about the likely method of disposition, such as through sales to individual customers, returns to product vendors, or liquidations, and expected recoverable values of each disposition category.
Property and Equipment, net
Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, as follows:
Estimated Residual Category Estimated Useful Life Value Electronic and office equipment 3-5 years 5% or 10% Vehicles 5 years 5% Buildings 36 years 10% Leasehold improvement shorter of lease term - or 5 years
Repair and maintenance costs are charged to expense as incurred, whereas the cost of renewals and betterment that extend the useful lives of property and equipment are capitalized as additions to the related assets. Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts with any resulting gain or loss reflected in the consolidated statements of operations.
Goodwill
Goodwill represents the excess of the purchase price over the amount assigned to the fair value of assets acquired and liabilities assumed. In accordance with ASC 350, "Intangibles - Goodwill and Other", goodwill is not amortized, but rather is tested for impairment annually or more frequently if indicators of impairment present. The Group assigned and assessed goodwill for impairment at the reporting unit level. The Group determines that each reporting unit is identified at the operating segment level. The Company adopted ASU No. 2011-08 ("ASU 2011-08"), Intangibles-Goodwill and Other (ASC 350), pursuant to which the Company has the option to first assess qualitative factors to determine whether it is necessary to perform the two-step test. The Company would not be required to calculate the fair value of a reporting unit unless the entity determines, based on the qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The Company would perform the two-step quantitative goodwill impairment test if it is not more likely than not that its fair value is less than its carrying amount. The first step of the impairment test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. Fair value is primarily determined by computing the future discounted cash flows expected to be generated by the reporting unit. If the carrying value exceeds the fair value, goodwill may be impaired. If this occurs, the Group performs the second step of the goodwill impairment test to determine the amount of impairment loss. The fair value of the reporting unit is allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. If the carrying amount of the goodwill is greater than its implied fair value, the excess is charged as an impairment loss. Annual goodwill impairment test is performed as at December 31.
Other Intangible Assets
Other intangible assets consisting of computer software, website, acquired customer relationship and capitalized software development costs are carried at cost less accumulated amortization and impairment, if any.
Acquired customer relationships are related to the ability to sell existing services to existing customers. Customer relationships acquired from third parties have been recognized initially at fair value at the date of acquisition using a valuation technique based on expected income. Customer relationships acquired from an entity under common control are measured at their carrying amounts in the accounts of the transferring entity at the date of transfer.
Capitalized software development costs represent capitalized costs of producing software for sale in accordance with ASC 985-20, "Costs of software to be sold, leased or marketed". All costs incurred prior to establishing the technological feasibility of a computer software product to be sold, leased, or otherwise marketed are charged to expense when incurred. Capitalization of computer software costs ceases when the product is available for general release to customers and is amortized over the useful life on a straight line basis.
Intangible assets with a finite useful life are carried at cost less accumulated amortization. Intangible assets with a finite useful life are generally amortized on a straight-line basis over the useful lives of the respective assets, which are set out as follows:
Category Estimated Useful Life Computer software 5 years Website 5 years Acquired customers relationships 5-6.25 years Capitalized software development costs 2-5 years
Impairment of Long-Lived Assets
The Group evaluates its long-lived assets or asset group with finite lives for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying amount of a group of long-lived assets may not be fully recoverable. When these events occur, the Group evaluates the impairment by comparing the carrying amount of the assets to future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Group recognizes an impairment loss based on the excess of the carrying amount of the asset group over its fair value.
Fair Value of Financial Instruments
Financial instruments of the Group primarily comprise of cash and cash equivalents, accounts receivables, other current assets, accounts payable and derivative financial liabilities related to the options granted to nonemployees. The carrying values of these financial instruments, other than derivative financial liabilities, approximate their fair values due to their short-term maturities. The derivative financial liabilities which were reclassified from equity as it meets the definition of derivative upon the performance completion were recorded at fair value as determined on the performance completion date related to the option granted to nonemployee and subsequently adjusted to the fair value at each reporting date (Note 20). The Group determined the fair values of derivative financial liabilities with the assistance of an independent third party valuation firm.
Revenue Recognition
Revenue is derived from M2B e-commerce services and M2C e-commerce services. Revenue for each type of service is recognized in accordance with ASC 605-10, "Revenue Recognition: Overall" when the following four criteria are met: (i) persuasive evidence of an arrangement exists; (ii) the service has been rendered; (iii) the fees are fixed or determinable; (iv) collectability is reasonably assured.
M2B e-commerce services
The Group provides M2B e-commerce services to connect manufacturers in China with international buyers through its online marketplaces. M2B e-commerce services consist principally of global manufacturer certificate ("GMC") service, listing services, matching services, storefront services, catalog services and exhibition services.
The GMC service is based on a proprietary evaluation process wherein a customer is awarded a certificate to indicate that it has successfully met the evaluation criteria. The Group engages an external third party with expertise in quality testing and certification to execute the evaluation procedures which typically require less than 1 month to complete.
Listing services involve the production and maintenance of customer product or service offering information in databases ("Customer Database") that are interfaced to the Group's online website to enable users to search for products, services and other information provided by the Group's customers. The listing services typically have a term of 1 or 2 years.
Matching services utilizes the information contained in the Customer Database to identify suppliers whose product or service offerings matches the sourcing requests obtained from potential buyers. Once there is a match, the Group provides a notification to both parties with their respective contact information and/or facilitates contact between the parties. The Group does not guarantee any business will arise from its matching results. The matching services typically have a term of 1 or 2 years.
Storefront services utilize the information contained in the Customer Database to develop virtual storefronts on the Group's online website. These storefronts enable potential buyers to obtain information concerning the customer. The storefront services typically have a term of 1 or 2 years.
Catalog services involve the production and distribution of monthly or bi-monthly product/service catalog that lists the offerings of its customers. The catalog services typically have a term of 1 or 2 years.
Exhibition services involve displaying products and distributing a customer's marketing material of its products or services at trade fairs. The exhibition services typically have a term of 1 or 2 years.
The Group enters into M2B service arrangements with its customers that contain multiple service deliverables because each of the services in the arrangement is explicitly referred to as an obligation of the Group, requires distinct actions by the Group and the inclusion or exclusion of each service in the contract are expected to cause the service consideration to vary. GMC service was provided on a standalone basis to a significant number of its customers and as a result,the Group recognized GMC service as a separate deliverable in multiple element arrangements that are entered into. The Group will continue to monitor whether standalone value of GMC service is established such that GMC services in the multiple arrangements may be recognized as a separate deliverable. According to ASC 605-25, "Multiple-Element Arrangements", the total arrangement consideration is allocated to each unit of accounting based on its relative selling price which is determined based on the Group's best estimate of the selling price for that deliverable because neither vendor-specificevidence nor third-party evidence of selling price exists. In determining its best estimate of selling price for each deliverable, the Group considered its overall pricing model and objectives, as well as market or competitive conditions that may impact the price at which the Group would transact if the deliverable were sold regularly on a standalone basis. The Group will monitor the conditions that affect its determination of selling price for each deliverable and will reassess such estimates periodically.
Written contracts are signed by the Group and customer to document the agreed terms of each M2B service arrangement. Side arrangements or subsequent changes are not made to signed contracts. M2B arrangements have service terms of 1 or 2 years for all services to be performed except the GMC service which is a provision of a certificate to the customer to indicate that such customer has undergone an evaluation process to certify certain criteria have been met. The Group does not monitor whether the customer continues to meet the criteria once the GMC certificate is issued and cannot revoke the issued GMC certificate for any reason, including if the GMC certificate holder does not meet the criteria subsequent to the issuance of the GMC certificate. The arrangement fee is fixed and not subject to variable or contingent provisions or general rights to refund. The Group performs credit assessments on its customers prior to selling on credit to ensure collectability is reasonably assured. In accordance with ASC 605-10, revenue is recognized for each separate unit of accounting upon satisfying the four criteria for revenue recognition stated above. For listing services, catalog services and exhibition services which are separate units of accounting, revenue is recognized ratably over the service period, generally over a term of 1 or 2 years, assuming the other criteria for revenue recognition have been met. For GMC service which is sold by the Group on a standalone basis, revenue is recognized upon the delivery of the GMC certificate for the compliance of GMC standards or when the customer is informed of its failure to comply with the GMC standards. For those deliverables that are combined with the last delivered element in an arrangement, the allocated amount to the combined unit is recognized as revenue over the service period in which the last delivered element is performed, generally over a term of 1 or 2 years, assuming the other criteria for revenue recognition have been met.
M2C e-commerce services
The Group provides M2C e-commerce service to sell general merchandise sourced from manufacturers and distributors in China and to operate the feifei.com marketplace program, under which third-party merchants sell general merchandise on the Company's website.
Customers place their order for products online fixing the related selling price and shipping charge. Payment for the purchased product is made before delivery. Revenue, net of discounts and return allowances, are recorded when title passes to customers upon delivery. Return allowances, which reduce product revenue, are estimated based on historical experience. Shipping charges to customers are included in product revenue and totaled US$6 and US$518 for the years ended December 31, 2013 and 2014, respectively.
Prior to December 2014, the Company is the primary obligor of the transactions by assuming inventory risk. Starting from December 2014, the Company only acts as an agent to earn a fixed fee by providing the platform for trading between manufacturers and customers. In accordance with ASC 605, "Revenue Recognition", the Company records product sales and related costs on a gross basis as it is the primary obligor in a transaction. When the Company is not the primary obligor in a transaction but instead acting as an agent, fees earned are recorded on a net basis.
Cost of Revenues
Cost of revenue for M2B e-commerce service comprises direct costs incurred for the provision of services and an allocation of indirect overhead costs. Cost of revenue for M2C e-commerce service represents the purchase price of consumer products sold by the Company when the Company is the primary obligor in a transaction.
The Group is subject to business taxes and surcharges levied on services provided in China. In accordance with ASC 605-45, "Revenue Recognition - Principal Agent Considerations", all such business taxes and surcharges are presented as cost of revenues on the consolidated statements of comprehensive income. Business taxes, value-added taxes and surcharges for the years ended December 31, 2013 and 2014 are approximately US$1,426 and US$1,768, respectively.
Commission Costs
The Group's sales personnel are entitled to commission calculated based on a percentage of total service fees earned. The commission is paid to the sales employees after the service fees are collected from the customers. Since the commissions incurred are considered direct and incremental to securing service revenue agreements, they are capitalized and deferred in accordance with ASC 605-20-25, "Revenue - Services - Recognition". Commissions are charged to selling and marketing expenses in proportion to the revenue recognized. Commission expenses were approximately US$3,130 and US$1,198 for the years ended December 31, 2013 and 2014, respectively.
Fulfillment
Fulfillment costs represent packaging material costs and those costs incurred in outbound shipping, operating and staffing the Group's fulfillment and customer service centers, including costs attributable to buying, receiving, inspecting and warehousing inventories; picking, packaging and preparing customer orders for shipment; processing payment and related transaction costs and responding to inquiries from customers. Fulfillment costs also contain third party transaction fees, such as credit card processing and debit card processing fees. Shipping cost amounted to US$136 and US$850 for the years ended December 31, 2013 and 2014, respectively.
Advertising Expenditure
Advertising costs are expensed when incurred and are included in "selling and marketing expenses" in the consolidated statements of comprehensive income. Advertising expenses were approximately US$2,379 and US2,851 $for the years ended December 31, 2013 and 2014, respectively.
Leases
Leases are classified at the inception date as either a capital lease or an operating lease. For the lessee, a lease is a capital lease if any of the following conditions exists: a) ownership is transferred to the lessee by the end of the lease term, b) there is a bargain purchase option, c) the lease term is at least 75% of the property's estimated remaining economic life or d) the present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date. A capital lease is accounted for as if there was an acquisition of an asset and an incurrence of an obligation at the inception of the lease. All other leases are accounted for as operating leases. The Group leases certain office facilities under non-cancelable operating leases. The Group had no capital lease for any of the periods stated herein.
Income Taxes
The Group follows the liability method of accounting for income taxes in accordance with ASC 740, "Income Taxes". Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Group records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in the consolidated statements of comprehensive income in the period that includes the enactment date.
The Group applies ASC 740 to account for uncertainties in income taxes. Interest and penalties arising from underpayment of income taxes shall be computed in accordance with the related PRC tax law. The amount of interest expense is computed by applying the applicable statutory rate of interest to the difference between the tax position recognized and the amount previously taken or expected to be taken in a tax return. Interest and penalties recognized in accordance with ASC 740-10 is classified in the consolidated statements of comprehensive income as income tax expense.
In accordance with the provisions of ASC 740-10, the Group recognizes in its financial statements the impact of a tax position if a tax return position or future tax position is "more likely than not" to prevail based on the facts and technical merits of the position. Tax positions that meet the "more likely than not" recognition threshold are measured at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement. The Group's estimated liability for unrecognized tax benefits which is included in the "accrued expenses and other liabilities" account is periodically assessed for adequacy and may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. The outcome for a particular audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases, appeal or litigation process. The actual benefits ultimately realized may differ from the Group's estimates. As each audit is concluded, adjustments, if any, are recorded in the Group's financial statements. Additionally, in future periods, changes in facts, circumstances, and new information may require the Group to adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the changes occur.
Share-based compensation
Share options granted to employees are accounted for under ASC 718, "Share-Based Payment". In accordance with ASC 718, the Company determines whether a share option or restricted share unit ("RSU") should be classified and accounted for as a liability award or an equity award. All grants of share options or RSUs to employees classified as equity awards are recognized in the financial statements based on their grant date fair values. Compensation cost for an award with a performance condition shall be accrued only if it is probable that the performance condition will be achieved. Compensation cost related to performance options that only vest on consummation of liquidity events such as initial public offerings and change in control events is recognized when liquidity event is consummated. The Company recognizes compensation expenses using the accelerated method for share options granted and the straight-line method for RSUs granted.
ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates. Forfeiture rate is estimated based on historical and future expectation of employee turnover rate and are adjusted to reflect future change in circumstances and facts, if any. Share-based compensation expense is recorded net of estimated forfeitures such that expense was recorded only for those share-based awards that are expected to vest. To the extent the Company revises this estimate in the future, the share-based payments could be materially impacted in the period of revision, as well as in following periods.
The Company records share-based compensation expense for awards granted to non-employees in exchange for services at fair value in accordance with the provisions of ASC 505-50, "Equity based payment to non-employees". For the awards granted to non-employees, the Company will record compensation expenses equal to the fair value of the share options at the measurement date, which is determined to be the earlier of the performance commitment date or the service completion date. Upon the performance completion, the awards will subject to the requirements of ASC 815 and be reclassified from equity to liability if it meets the definition of derivative. Accordingly, the fair value of the awards will be measured at each reporting date with changes in fair value recognized as compensation expenses until the awards are exercised or expired.
The Company, with the assistance of an independent valuation firm, determined the fair values of the share-based compensation options recognized in the consolidated financial statements. The binomial option pricing model is applied in determining the estimated fair value of the options granted to employees and non-employees.
When the vesting conditions of a share-based payment are modified, the Company first determines whether the original vesting conditions were expected to be satisfied on the modification date. When a vesting condition that is probable of achievement is modified and the new vesting condition also is probable of achievement, the compensation cost to be recognized if either the original vesting condition or the new vesting condition is achieved cannot be less than the grant-date fair value of the original award. That compensation cost is recognized if either the original or modified vesting condition is achieved. If the modification also increases the fair value of the award, the incremental compensation cost associated with the modification is recognized only if the modified vesting condition is satisfied.
Earnings per Share
Earnings per share are calculated in accordance with ASC 260, "Earnings Per Share". Basic earnings per ordinary share is computed by dividing income attributable to holders of ordinary shares by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per ordinary share reflect the potential dilution that could occur if securities to issue ordinary shares were exercised.
Government Grants
Government grants are provided by the relevant PRC municipal government authorities to subsidize the cost of certain research and development projects and to encourage investments in the PRC. The amount of such government grants are determined solely at the discretion of the relevant government authorities and there is no assurance that the Company will continue to receive these government grants in the future. Government grants are recognized when it is probable that the Company will comply with the conditions attached to them, and the grants are received. When the grant relates to an expense item, it is recognized in the statement of operations over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate, as a reduction of the related operating expense. Where the grant relates to an asset, the government grant received is accounted as a deduction from the carrying amount of the related asset.
Comprehensive Income (loss)
Comprehensive income is defined as the changes in equity of the Group during a period from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. Accumulated other comprehensive income, as presented on the consolidated balance sheets, includes the cumulative foreign currency translation adjustments.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09 ("ASU 2014-09"), Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)", and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim period within that reporting period. Early adoption is not permitted. On April 1, 2015, the FASB decided to propose a one-year deferral of the effective date for its new revenue standard for public and nonpublic entities reporting under U.S. GAAP. The Company is in the process of evaluating the effect of the update on the Company's consolidated financial statements.
In August 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-15 ("ASU 2014-15"), Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which requires management to assess company's ability to continue as a going concern. The amendments are effective for reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company does not expect the adoption of ASU 2014-15 will have a significant effect on its consolidated financial statements.
3.Concentration of credit risk
Assets that potentially subject the Group to significant concentration of credit risk primarily consist of cash and accounts receivable. As at December 31, 2014, substantially all of the Group's cash was deposited in financial institutions located in the PRC, including mainland China and Hong Kong, which management believes are of high credit quality. Accounts receivable are typically unsecured and are derived from revenue earned from customers in the PRC. The risk with respect to accounts receivable is mitigated by credit evaluations the Group performs on its customers and its ongoing monitoring of outstanding balances.
Concentration of customers
There are no revenues from customers which individually represent greater than 10% of the total revenue for any of the periods presented.
Current vulnerability due to certain other concentrations
The Group's operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than 30 years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC's political, economic and social conditions. There is also no guarantee that the PRC government's pursuit of economic reforms will be consistent or effective.
Currency convertibility risk
The Group transacts the majority of its business in RMB, which is not freely convertible into foreign currencies. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the People's Bank of China (the "PBOC"). However, the unification of the exchange rates does not imply that the RMB may be readily convertible into United States dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the PBOC or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the PBOC. Approval of foreign currency payments by the PBOC or other institutions requires submitting a payment application form together with suppliers' invoices, shipping documents and signed contracts. Additionally, the value of the RMB is subject to changes in central government policies and international economic and political developments affecting supply and demand in the PRC foreign exchange trading system market.
Other business risk
Internet related businesses are subject to significant restrictions under current PRC laws and regulations. Specifically, foreign investors are not allowed to own more than a 50% equity interest in any ICP business. Currently, the Group conducts its ICP operations in China through contractual arrangements among Global Market Guangzhou, Guangzhou Shen Long and legal shareholders of Guangzhou Shen Long. The relevant regulatory authorities may find the current contractual arrangements and businesses to be in violation of any existing or future PRC laws or regulations. If so, the relevant regulatory authorities would have broad discretion in dealing with such violations.
Foreign currency exchange rate risk
On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to US$. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximately 0.2% and 3.0% appreciation of the RMB against the US$ in 2012, 2013, respectively, and an approximately 0.4% depreciation of the RMB against the US$ in 2014. On June 19, 2010, the People's Bank of China announced the end of the RMB's de facto peg to US$, a policy which was instituted in late 2008 in the face of the global financial crisis, to further reform the RMB exchange rate regime and to enhance the RMB exchange rate flexibility. On March 15, 2014, the People's Bank of China announced the widening of the daily trading band for RMB against US$. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant volatility of the RMB against the US$.
4.ACCOUNTS RECEIVABLE
As at As at December December 31, 2014 31, 2013 ---------- ---------- US$ US$ Accounts receivable 1,126 362 Less: Allowance for doubtful accounts (44) - ---------- ---------- Accounts receivable, net 1,082 362 ========== ==========
Movement in allowance for doubtful accounts:
2014 2013 ----- ----- US$ US$ Balance at beginning of the year - - Additional provision charged to expenses 44 - Write-offs - - ----- ----- Balance at end of the year 44 - ===== =====
5.PREPAYMENTS AND OTHER CURRENT ASSETS
As at As at December December 31, 2014 31, 2013 -------------------- -------------------- US$ US$ Prepaid expenses 1,458 2,184 Deposits for office leases 304 240 Capitalized commission costs 2,062 1,507 Advance to supplier 156 99 Others 1,330 713 -------------------- -------------------- Total 5,310 4,743 ==================== ====================
6.PROPERTY AND EQUIPMENT, NET
As at As at December December 31, 2014 31, 2013 -------------------- ---------- US$ US$ Electronic and office equipment 1,797 1,614 Vehicles 210 - Buildings 1,925 1,932 Leasehold improvement 1,620 724 Construction in progress 1,132 1,443 -------------------- ---------- Property and equipment, cost 6,684 5,713 Less: Accumulated depreciation (1,762) (1,298) -------------------- ---------- Property and equipment, net 4,922 4,415 ==================== ==========
Depreciation expenses amounted to approximately US$421 and US$479 for years ended December 31, 2013 and 2014, respectively.
7.GOODWILL AND OTHER INTANGIBLE ASSETS, NET
The changes in carrying amount of goodwill for the years ended December 31, 2013 and 2014 are as follows:
US$ Balance as at December 31, 2013 6,510 Foreign currency translation adjustment (2) ------ Balance as at December 31, 2014 6,508 ======
Other intangible assets consist of the following:
As at As at December December 31, 2014 31, 2013 ---------- ---------- US$ US$ Computer software 1,810 1,451 Website 637 640 Acquired customers relationships 612 613 Capitalized software development costs 3,803 3,033 Less: Accumulated amortization (2,312) (1,329) ---------- ---------- Total 4,550 4,408 ========== ==========
Amortization expense amounting to approximately US$474 and US$972 for the years ended December 31, 2013 and 2014, respectively, were recorded in general and administrative expenses on the consolidated statements of comprehensive income. Amortization expense amounting to approximately US$17 and US$15 for the years ended December 31, 2013 and 2014, respectively, were recorded in cost of revenues on the consolidated statements of comprehensive income.
The estimated annual amortization expense of intangible assets for each of the following five fiscal years are as follows:
US$ ------ 2015 1,060 2016 1,056 2017 1,029 2018 756 2019 235 ------ Total 4,136 ======
8.OTHER NON-CURRENT ASSETS
As at As at December December 31, 2014 31, 2013 US$ US$ Deposits 96 163 Prepaid land lease payment 93 - Loans to employees 3,667 3,500 ---------- ---------- Total 3,856 3,663 ========== ==========
The Group granted interest-free loans to high performing senior managers, managers and sales representatives to purchase cars. The loans granted to senior managers and managers would be settled when they exercised share options, while the loans granted to sales representatives would be repaid through monthly salary deduction over the next 15 months. The cars purchased by the employees are pledged to the Group as collateral for the loans.
9.ACCRUED EXPENSES AND OTHER LIABILITIES
As at As at December December 31, 2014 31, 2013 ---------- ---------- US$ US$ Salary and welfare payable 3,129 3,642 Accrued operating expenses 2,734 3,092 Professional fees 112 115 Other taxes payable 550 414 Others 75 44 ---------- ---------- Total 6,600 7,307 ========== ==========
10. CONTINGENTLY REDEEMABLE NONCONTROLLING INTEREST
On March 26, 2014, Guangzhou Daily Newspaper Business Co., Limited ("Guangzhou Daily"), a third-party, injected US$6,496 (RMB40,000) to obtain 10.53% equity interests of the Company's subsidiary, Guangzhou Longfei (the "Contingently Redeemable Noncontrolling Interests").
Guangzhou Daily may require the Company to redeem all of its equity interest in Guangzhou Longfei if i) the Company and its subsidiaries (except Guangzhou Longfei) engage in business with competition with Guangzhou Longfei; ii) Guangzhou Longfei cannot achieve a success IPO on the stock exchange (domestic or oversea stock exchange) before December 31, 2021; or iii) the Group does not transfer all the registered trademarks for M2C business to Guangzhou Longfei as specified in the share purchase agreement.The redemption price will equal to the initial capital injection amount increased at the rate of ten percent (10%) per annum.
In addition, Guangzhou Daily has a call option to obtain from the Company an additional equity interest in Guangzhou Longfei of up to 3.75% for nil consideration if Guangzhou Longfei's revenues were below RMB150,000 during the period from April 1, 2014 to March 31, 2015 based on a predetermined formula. Conversely, the Company has an option to obtain Guangzhou Daily's equity interest in Guangzhou Longfei of up to 2.2% for nil consideration if Guangzhou Longfei's revenues exceed RMB150,000 during the period from April 1, 2014 to March 31, 2015 based on a predetermined formula.
The Contingently Redeemable Noncontrolling Interests have been classified as mezzanine equity as they can be redeemed at the option of the holder upon the occurrence of certain contingent events outside the control of the Company. The redemption feature and the contingent call or put option features embedded in the Contingently Redeemable Noncontrolling Interests were not required to be bifurcated because the underlying equity interests of Guangzhou Longfei are not net settleable, publicly traded nor readily convertible into cash.
The initial carrying value of the Contingently Redeemable Noncontrolling Interests is the Purchase Price of US$6,496. The Company concluded that the Contingently Redeemable Noncontrolling Interests are not redeemable currently, but it is probable that the Contingently Redeemable Noncontrolling Interests will become redeemable. The Company elected to recognize changes in the redemption value immediately as they occur and adjust the carrying value of the Contingently Redeemable Noncontrolling Interests to equal the redemption value at the end of each reporting period. An accretion charge of US$1,468 was recorded as a reduction of income available to ordinary shareholders for the year ended December 31, 2014.
The movement of carrying value of the Contingently Redeemable Noncontrolling Interests is as follows:
US$ Balance as at January 1, 2014 - Initial capital injection 6,496 Net loss attributable (985) Changes in redemption value 1,468 ------ Balance as at December 31, 2014 6,979 ======
11. SHAREHOLDERS' EQUITY
Ordinary shares
On September 26, 2013, the Company issued 50,000 ordinary shares of US$0.0002 each to the Company's Independent Non-Executive Director in accordance with his letter of appointment dated June 6, 2012.
On January 28, 2014, the Company repurchased in aggregate 4,503,000 ordinary shares of the Company from NIFSMBC-V2006S1 Investment Limited Partnership and NIFSMBC-V2006S3 Investment Limited Partnership at an average price of GBP0.291 per share. These shares are held as treasury shares.
The Company did not pay or declare any dividends on ordinary shares for the years ended December 31, 2013 and 2014.
Accumulated other comprehensive loss
Changes in accumulated other comprehensive loss by component, net of tax of nil, for the years ended December 31, 2013 and 2014 are as follows:
Foreign currency translation Total US$ US$ Balance as at January 1, 2013 (146) (146) Other comprehensive income 204 204 ----------------- -------- Balance as at December 31, 2013 58 58 Other comprehensive income (68) (68) ----------------- -------- Balance as at December 31, 2014 (10) (10) ================= ========
12. INCOME TAXES
Cayman Islands
Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gains.
British Virgin Islands
Under the current laws of the British Virgin Islands, the Company is not subject to tax on income or capital gains.
Hong Kong
For the years ended 31 December 2013 and 2014, profits tax in Hong Kong was generally assessed at the rate of 16.5% on the taxable income arising in or derived from Hong Kong. Upon payments of dividends by Hong Kong companies to their shareholders, there was no Hong Kong dividend withholding tax.
China
Effective from January 1, 2008, the PRC's statutory income tax rate in 2013 and 2014 is 25%. The Company's PRC subsidiaries are subject to income tax at 25% except for the following:
Suzhou Long Mei is qualified as a "Software and Integrated Circuit Enterprise" and was granted a full exemption of income tax for two years and a 50% reduction in income tax for the succeeding three years ("2+3 tax holiday") starting from its first profit-making year. Suzhou Long Mei started its 2+3 tax holidays in 2010. As a result, Suzhou Long is subject to income tax at 12.5% from 2012 to 2014.
Guangzhou Longtian was qualified as a "Software Enterprise" and was granted a 2+3 tax holiday starting from its first profit-making year in 2012. As such, Guangzhou Longtian is income tax exempted for 2012 and 2013 and is subject to income tax at 12.5% from 2014 to 2016.
Further, pursuant to the prevailing income tax law and its relevant regulations, qualified research and development ("R&D") expenses are subject to an additional 50% super deduction. Moreover, dividends paid by PRC tax residents to non-PRC tax residents shareholders, for earnings derived since January 1, 2008 are subject to a 10% PRC dividend withholding tax, unless tax treaty reliefs are available.
Corporate Income Tax
Loss before income taxes consists of:
For the years ended December 31, ---------------------- 2014 2013 ---------- ---------- US$ US$ British Virgin Islands 101 (38) Cayman Island (504) (224) Hong Kong (21) (178) PRC (7,003) (8,911) ---------- ---------- Total (7,427) (9,351) ========== ==========
The current and deferred components of the income tax expense appearing in the consolidated statements of comprehensive income are as follows:
For the years ended December 31, ---------------------- 2014 2013 ---------- ---------- US$ US$ Current tax (expense) benefit (12) 3 Deferred tax expense (3) (200) ---------- ---------- Income tax expense (15) (197) ========== ==========
The reconciliation of income tax expense computed by applying the PRC statutory income tax rate to income before income tax and the actual income tax benefit is presented below.
For the years ended December 31, ---------------------- 2014 2013 ---------- ---------- US$ US$ Income before income tax (7,427) (9,351) Income tax expenses computed at the PRC statutory tax rate of 25% 1,857 2,338 Effect of different tax rates in different jurisdictions (21) (78) Effect of tax holidays 162 (68) Non-deductible expenses Share-based compensation (107) (165) Others (290) (95) Income not subject to tax 11 29 Effect of different tax rates 205 - in differed tax items Changes in valuation allowance (1,844) (2,106) Investment basis difference in PRC Domestic Entities (16) 4 Other 28 (56) ---------- ---------- Actual income tax benefit (15) (197) ========== ==========
The aggregate amount and per share effect of tax holidays or preferential tax rate are as follows:
For the years ended December 31, ---------------------- 2014 2013 ---------- ---------- US$ US$ The aggregate amount 162 (68) ========== ========== The aggregate effect on basic and diluted earnings per share: Basic and diluted Nil Nil ========== ==========
Deferred Tax
The Group's significant components of deferred tax assets and liabilities are as follows:
As at As at December December 31, 2014 31, 2013 ---------- ---------- US$ US$ Deferred tax assets, current portion: Accrued expense 1,071 702 Excessive advertising expense deductible in the future 287 147 Bad debt provision 164 126 Less: Valuation allowance (1,522) (975) ---------- ---------- Total - - ========== ========== Deferred tax assets, non-current portion: Capitalized software development cost 12 18 Intangible assets and property and equipment 72 62 Net operating loss 3,049 1,756 Less: Valuation allowance (3,133) (1,836) ---------- ---------- Total - - ========== ========== Deferred tax liabilities, non-current portion: Customer relationships - 8 Intangible assets and property and equipment 60 67 Investment basis in PRC Domestic Entities 41 23 ---------- ---------- Total 101 98 ========== ==========
In assessing the realizability of deferred tax assets, the Company has considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company records a valuation allowance to reduce deferred tax assets to a net amount that management believes is more-likely-than-not realizable based on the weight of all available evidence.
As of December 31, 2014, the Company had net operating losses of approximately US$12,365 from various subsidiaries, which can be carried forward to offset future net profit for income tax purposes. The net operating loss carryforward as at December 31, 2014 will expire in years 2015 to 2019 if not utilized.
Unrecognized Tax Benefits
For the years ended December 31, 2013 and 2014, the Company recorded unrecognized tax benefits of approximately US$2 and US$2, respectively, which is mainly related to non-deductible expenses. The management does not expect the amount of unrecognized tax benefits will change significantly in the next 12 months. US$2 if ultimately recognized will impact the effective tax rate.
The unrecognized tax benefits are analyzed as follows:
As at December 31 -------------------- 2014 2013 --------- --------- US$ US$ Balance-beginning 2 30 Addition related to tax positions in current year - - Settlement for tax positions of prior years - (27) Foreign currency adjustment - (1) --------- --------- Balance-ending 2 2 ========= =========
During the years ended December 31, 2013 and 2014, the Company did not recognize any interest and penalties related to unrecognized tax benefits. There was no accrued interest and penalties related to unrecognized tax benefits as of December 31, 2013 and 2014.
The Company's PRC subsidiaries' tax years 2009 through 2014 remain open to examination by the PRC tax authorities and the Company's Hong Kong subsidiary's tax years 2005 through 2013 remain open to examination by the Hong Kong Inland Revenue Department.
13.SHARE-BASED PAYMENTS
Options granted to Consultants
(a) Granted by a shareholder
On July 11, 2008, Mr. Weijia Pan, a principal shareholder of the Company, entered into an stock option agreement with the consultant, Hanson Westhouse Limited ("Hanson Westhouse"), under which, Hanson Westhouse paid Great British Pound ("GBP" or "GBP") 1 to Mr. Weijia Pan in exchange for a fully vested options to purchase from Mr. Weijia Pan 489,845 ordinary shares with an exercise price of US$0.6533 per share. These options are exercisable at any time during the period of two years commencing from the date of the completion of the Company's listing of its ordinary shares on a stock exchange in the United States or in Hong Kong.
As of December 31, 2014, the options granted by Mr. Weijia Pan to Hanson Westhouse to purchase an aggregate of 489,845 shares with exercise prices of US$0.6533 per share were still outstanding which will expire two years after the completion of an initial public offering in the United States or in Hong Kong. As of December 31, 2014, the aggregate intrinsic value of options granted to Hanson Westhouse was nil.
(b) Granted by the Company
The following table summarized the consultant share options granted by the Company for the years ended December 31, 2014:
Weighted Weighted Average Average per Share Remaining Aggregated Number Exercise Contractual Intrinsic Granted by the Company of option Price Term Value US$ (Years) US$'000 Outstanding, January 1, 2014 226,000 2.04 8.47 ========== Granted - - Forfeited - Exercised - ---------- Outstanding, December 31, 2014 226,000 2.04 7.47 - ========== Vested and expected to vest at December 31, 2014 226,000 2.04 7.47 - ========== Exercisable at December 31, 2014 - ==========
As of December 31, 2014, the Company has options outstanding granted to consultants to purchase an aggregate of 226,000 shares with exercise prices of GBP1.3 per share which will expire in 7.47 years. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the estimated fair value of the underlying stock at each reporting date, for those awards that have an exercise price below the fair value of the Company's ordinary shares. As of December 31, 2014, the aggregate intrinsic value of options granted to consultant on June 18, 2012 was nil. The total grant date fair value of the options granted to consultants during the year ended December 31, 2014 was US$253.
The 140,000 stock options granted to two external consultants were subject to the requirements of ASC 815 and was reclassified from equity to liability as it meets the definition of derivative on performance completion date.
Employee options
In order to attract and retain the best available personnel, provide additional incentives to employees and directors and promote the success of the Company's business, the Company adopted a 2010 equity incentive plan in 2009 (the "2010 Plan"). Under the 2010 Plan, the Company may grant options to its employees and directors to purchase an aggregate of no more than 5,000,000 ordinary shares of the Company, subject to different vesting requirements. The 2010 Plan was approved by the Board of Directors and shareholders of the Company on July 23, 2009.
The 2010 Plan will be administered by the Compensation Committee as set forth in the Option Plans (the "Plan Administrator"). The officers of the Company have been authorized and directed by the Plan Administrator to execute Option Agreements with those persons selected by the Plan Administrator and issue ordinary shares of the Company upon exercise of any options so granted pursuant to the terms of an Option Agreement. All options granted under the 2010 Plans have a term of ten years from the option grant date.
(a) Options Granted to Employees
The following table summarized the Company's employee share option activity under the Option Plans for the years ended December 31, 2014:
Weighted Weighted Average Average per Share Remaining Aggregated Number Exercise Contractual Intrinsic Granted by the Company of option(*) Price Term Value US$ (Years) US$'000 Outstanding, January 1, 2014 4,882,437 1.55 7.54 - ============= Granted - Forfeited (430,934) (1.80) Exercised - ------------- Outstanding, December 31, 2014* 4,451,503 1.53 6.47 - ============= Vested and expected to vest at December 31, 2014* 4,451,503 1.53 6.47 - ============= Exercisable at December 31, 2014 - =============
*Options to purchase 331,311and 318,159 shares granted to the Group's former employees in the logistics and M2C businesses before their disposal on September 9, 2010 were outstanding as of December 31, 2013 and 2014, respectively. Since the change in the status of these individuals from employees to non-employees of the Group arose from the disposal of the Group's logistics and M2C businesses through a spin-off transaction with its shareholders, no compensation expense will recognize in the future because these individuals will not be performing any services for the Group
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the estimated fair value of the underlying stock at each reporting date, for those awards that have an exercise price below the estimated fair value of the Company's shares.
As of December 31, 2014, there was US$527 of unrecognized share-based compensation cost related to options granted to employee by the Company, which are expected to be recognized over a weighted-average vesting period of 1.52 years. To the extent the actual forfeiture rate is different from the Company's estimate; actual share-based compensation related to these awards may be different from the expectation.
(b) Founder's Options
On April 29, 2010, Mr. Weijia Pan, a principal shareholder of the Company, entered into stock option agreements ("Option Agreements") with selected employees (the "Grantees") to purchase ordinary shares in the Company held by him at a fixed exercise ranging between US$0.005 to US$0.3 per share.
On September 8, 2010, Mr. Weijia Pan entered into stock option agreements with selected employees to purchase ordinary shares in the Company held by him at a fixed exercise price of US$1.75 per share.
The options granted by Mr. Weijia Pan vest upon the successful completion of the Company's initial public offering in any jurisdiction and continuous employment of the grantee with the Company for a period of 3 years after the completion of the offering. The awards were granted on April 29, 2010 and September 8, 2010, respectively, and have been accounted for as equity awards of the Company since the options were granted by a principal shareholder for service provided to the Company. The options are measured at the grant date fair value and a corresponding credit will be recorded in additional paid-in capital when vested.
The following table summarized the employee share options granted by the principal shareholder:
Weighted Weighted-Average Average per Share Remaining Aggregated Granted by Principal Number of Exercise Contractual Intrinsic shareholder option(*) Price Term Value US$ (Years) US$'000 Outstanding, January 1, 2014 1,969,749 0.24 6.35 545 ========== Granted - Forfeited (50,063) (0.04) Exercised ---------- Outstanding, December 31, 2014 * 1,919,686 0.25 5.35 1,176 ========== Vested and expected to vest at December 31, 2014 * 1,919,686 0.25 5.35 1,176 ========== Exercisable at December 31, 2014 - - - ==========
* Options to purchase 220,500 and 220,500 shares granted to the Group's former employees in the logistics and M2C businesses before their disposal on September 9, 2010 were outstanding as of December 31, 2013 and 2014 respectively. Since the change in the status of these individuals from employees to non-employees of the Group arose from the disposal of the Group's logistics and M2C businesses through a spin-off transaction with its shareholders, no compensation expense will recognize in the future because these individuals will not be performing any services for the Group.
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the estimated fair value of the underlying stock at each reporting date, for those awards that have an exercise price below the estimated fair value of the Company's shares.
As of December 31, 2014, there was US$105 of unrecognized share-based compensation cost related to options granted to employee by the Founder, which are expected to be recognized over a weighted-average vesting period of 1.20 years. To the extent the actual forfeiture rate is different from the Company's estimate; actual share-based compensation related to these awards may be different from the expectation.
(c) Modification of employee options
On June 22, 2014, the Company modified the vesting date of 2,306,132 options and 1,732,296 options granted to employees from June 22, 2014 and July 22, 2014 to June 22, 2015, respectively. Since the vesting condition was probable of achievement both before and after the modification,the modification of the vesting condition attached to the options was treated as a Type of probable-to-probable modification in accordance with ASC 718 on June 22, 2014. The incremental compensation cost of US$11 associated with the modification was recognized for the year ended December 31, 2014.
(d) Restricted share units
Pursuant to letter of appointment of independent non-executive director, the Company issued to an independent director 15,385 fully vested RSUs at nil subscription price on the Admission. In addition, on the first anniversary of the Company's admission to trading on the AIM Market of the London Stock Exchange in June 2012(the "Admission"), the Company will grant a number of fully vested RSUs with an aggregate fair value equivalent to GBP20,000 calculated based on the closing price per share on the last trading day before June 22, 2013, provided his appointment as an independent director of the Company has not been terminated or expired at the time of grant. On September 26, 2013, the Company issued 50,000 vested RSUs with par value US$0.0002 each to the independent director.
The RSUs are classified as liability awards which are measured based on the settlement date fair value. As of December 31, 2014, the RSUs granted to employee by the Company are all vested.
(e).Compensation cost
Total compensation cost relating to options and RUSs granted to employees and directors recognized for the years ended December 31, 2013 and 2014 are as follows:
The years ended December 31, ------------------ 2014 2013 -------- -------- US$ US$ Cost of revenues 19 42 Selling and marketing expenses 265 329 General and administrative expenses 195 390 -------- -------- Total 479 761 ======== ========
14.RELATED PARTY TRANSACTIONS
(a)Related parties
Name of related parties Relationship with the Group Global Market Logistics Co., Ltd. Entity control by the controlling shareholder
(b)The Group had the following related party transaction for the years presented:
The years ended December 31, ------------------ 2014 2013 -------- -------- US$ US$ Acquisition of the logistic assets from: Global Market Logistics Co., Ltd. 562 - ======== ========
On October 15, 2014, the Group entered into an asset transfer agreement with Global Market Logistic Co., Ltd. to purchase its logistic customer relationships at a cash consideration of US$562. As the carrying amount of the logistic customer relationship was nil in the book of Global Market Logistic Co., Ltd., the difference between the consideration and the carrying amount of US$562 was accounted for as a deemed distribution to the controlling shareholder.
15. BOARD REMUNERATION
During the years ended December 31, 2013 and 2014, the Company's Board of Directors earned remuneration for their activities as directors. In addition, Mr. Weijia Pan's remuneration reflects his role as Chief Executive Officer of the Company. Amounts are as follows:
2014 2013 US$ US$ Mr. Weijia Pan 76 65 Mr. Weiquan Hu 76 83 Mr. Wing Keong Siew 20 20 Mr. Ching Wang 2 - Mr. Gareth Richard Bullock 33 31 ----- ----- 207 199 ===== =====
At December 31, 2014 the following options granted under 2010 Plan were outstanding:
As of Granted Exercised As of Exercise January during during December price 1, 2014 the year the year 31, 2014 Mr. Weiquan Hu US$0.65 60,000 - - 60,000 US$0.3 86,250 - - 86,250 US$0.0075 86,250 - - 86,250 US$1.75 190,000 - - 190,000 GBP1.3 80,000 - - 80,000 -------- --------- --------- --------- 502,500 - - 502,500 ======== ========= ========= ========= Mr. Wing Keong Siew US$1.75 60,000 - - 60,000 US$1.75 60,000 - - 60,000 -------- --------- --------- --------- 120,000 - - 120,000 ======== ========= ========= ========= Mr. Gareth Richard Bullock GBP1.3 50,000 - - 50,000
16. EMPLOYEE DEFINED CONTRIBUTION PLAN
Full time employees of the Group in PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the PRC subsidiaries of the Group make contributions to the government for these benefits based on certain percentages of the employees' salaries. The Group has no legal obligation for the benefits beyond the contributions made. Such employee benefits, which were expensed as incurred, amounted to approximately US$1,871 and US$1,505 for the years ended December 31, 2013 and 2014, respectively.
Obligations for contributions to defined contribution retirement plans for full-time employees in Hong Kong, including contributions payable under the Hong Kong Mandatory Provident Fund Schemes Ordinance, are recognized as expenses in the statements of operations as incurred. Such employee benefits amounted to approximately US$148 and US$92 for the years ended December 31, 2013 and 2014, respectively.
17. COMMITMENTS AND CONTINGENCIES
(a)Operating lease commitments
Future minimum payments under non-cancelable operating leases with initial terms in excess of one year consist of the following at December 31, 2014:
US$ 2015 839 2016 282 2017 228 2018 192 2019 and thereafter 831 ------ 2,372 ======
Payments under operating leases are expensed on a straight-line basis over the periods of their respective leases. The Company's lease arrangements have no renewal options, rent escalation clauses, restrictions or contingent rents and are all conducted with third parties. For the years ended December 31, 2013 and 2014, rental expenses for all operating leases amounted to approximately US$1,715 and US$1,845, respectively.
(b)Variable interest entity structure
In the opinion of management, (i) the ownership structure of the Company and its VIE is in compliance with existing PRC laws and regulations; (ii) the contractual arrangements with the VIE and its shareholder are valid and binding, and will not result in any violation of PRC laws or regulations currently in effect; and (iii) the Group's business operations are in compliance with existing PRC laws and regulations in all material respects.
However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, the Company cannot be assured that PRC regulatory authorities will not ultimately take a contrary view to its opinion. If the current ownership structure of the Group and its contractual arrangements with VIEs are found to be in violation of any existing or future PRC laws and regulations, the Group may be required to restructure its ownership structure and operations in the PRC to comply with the changing and new PRC laws and regulations. In the opinion of management, the likelihood of loss in respect of the Group's current ownership structure or the contractual arrangements with VIEs is remote based on current facts and circumstances.
(c)Income taxes
As of December 31, 2014, the Group has recognized approximately US$2 accrual for unrecognized tax benefits (note 12). The final outcome of the tax uncertainty is dependent upon various matters including tax examinations, interpretation of tax laws or expiration of statutes of limitation. However, due to the uncertainties associated with the status of examinations, including the protocols of finalizing audits by the relevant tax authorities, there is a high degree of uncertainty regarding the future cash outflows associated with these tax uncertainties.
18. SEGMENT REPORTING
In accordance with ASC 280-10 "Segment Reporting: Overall", the Group's chief operating decision maker ("CODM") has been identified as the Chief Executive Officer, who reviews consolidated results of the Group when making decisions about allocating resources and assessing performance of the Group. The chief operating decision maker uses net income (loss) to evaluate the performance of each reportable segment. Accordingly, for the years ended December 31, 2013 and 2014, the Group operated and managed its business as M2B e-commerce segment and M2C e-commerce segment.
Business disclosures:
As for the years ended December 31, 2013 and 2014, the Group consisted of two segments, namely M2B e-commerce segment and M2C e-commerce segment.
The accounting policies used in its segment reporting are the same as those used in the preparation of the Group's consolidated financial statements. The Company does not allocate any assets to its M2B e-commerce segment and M2C China e-commerce services segment as management does not use this information to measure the performance of the reportable segments.
The Group's segment information as of and for year ended December 31, 2013 is as follows:
M2B M2C China Unallocated Total --------- ---------- ------------ --------- US$ US$ US$ US$ Revenues 24,916 793 - 25,709 Cost of revenues (3,329) (601) - (3,930) Fulfillment - (931) - (931) Selling and marketing expenses (20,509) (2,384) - (22,893) General and administrative expenses (6,314) (1,082) (363) (7,759) Other income 21 - - 21 Foreign exchange loss (gain) 59 - 5 64 Changes in fair value of derivative financial liabilities 65 - - 65 Interest income 302 1 - 303 Income tax expense (197) - - (197) Net loss (4,986) (4,204) (358) (9,548) Total assets 36,919 4,803 86 41,808 Total liabilities 22,278 1,435 138 23,851 Capital expenditure 5,876 1,148 - 7,024 Depreciation and amortization expense 823 89 - 920
The Group's segment information as of and for year ended December 31, 2014 is as follows:
M2B M2C China Unallocated Total ---------- ---------- ------------ ---------- US$ US$ US$ US$ Revenues 26,008 3,263 - 29,271 Cost of revenues (3,382) (3,343) - (6,725) Fulfillment - (3,235) - (3,235) Selling and marketing expenses (12,597) (3,381) - (15,978) General and administrative expenses (7,677) (3,105) (370) (11,152) Other income 35 - - 35 Foreign exchange loss (gain) (109) 54 114 59 Changes in fair value of derivative financial liabilities 13 - - 13 Interest income 199 86 - 285 Income tax expense (15) - - (15) Net income (loss) 2,475 (9,661) (256) (7,442) Total assets 28,990 8,455 99 37,544 Total liabilities 21,348 1,383 136 22,867 Capital expenditure 1,846 472 - 2,318 Depreciation and amortization expense 1,164 302 - 1,466
Geographic disclosures:
The Group primarily generates its M2B and M2C revenues from customers in Mainland China and Hong Kong in the PRC. All of the Group's long-lived assets are located in Mainland China and Hong Kong. Revenues from customers based on their geographical location for the year ended December 31, 2013 and 2014 are as follows:
For the years ended December 31, -------------------------------- 2014 2013 --------------- --------------- US$ US$ Mainland China 24,877 20,605 Hong Kong 4,394 5,104 --------------- --------------- Total 29,271 25,709 =============== ===============
19. EARNINGS PER SHARE
Basic and diluted earnings per share for each of the periods presented are calculated as follows:
For the years ended December 31, -------------------------------- 2014 2013 --------------- --------------- US$ US$ (Amounts in thousands except for the number of shares and per share data) Net loss attributable to ordinary shareholders used in calculating net income per ordinary share - basic and diluted (7,925) (9,548) =============== =============== Denominator: Weighted average number of ordinary shares outstanding used in calculating basic earnings per share: 93,667,371 97,801,236 Dilutive option - - Weighted average number of ordinary shares outstanding used in calculating diluted earnings per share: 93,667,371 97,801,236 Basic and diluted earnings per share: Basic earnings per share (0.09) (0.10) =============== =============== Diluted earnings per share (0.09) (0.10) =============== ===============
For the years ended December 31, 2013 and 2014, the share options granted by the Company are excluded from the computation of diluted earnings per share as their effects would have been anti-dilutive.
20.FAIR VALUE MEASUREMENT
The Group applies ASC 820 "Fair Value Measurements and Disclosures" in measuring fair value. ASC 820-10 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
ASC 820-10 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Unobservable inputs which are supported by little or no market activity.
ASC 820-10 describes three main approaches to measuring the fair value of assets and liabilities:
(1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.
In accordance with ASC 820-10, the Group measures the fair value of the derivative financial liabilities using a market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. As of December 31, 2013 and 2014, the Group, with the assistance of an independent valuation firms estimated the fair value of the share-based compensation liability using the binomial option pricing model with the following assumptions:
December December 31, 2013 31, 2014 ---------- ---------- Expected share option life 8.47 7.47 Estimated forfeiture rate - - Fair value of ordinary shares 0.52 0.86 Suboptimal exercise factor 2 2 Risk-free interest rates 2.62% 1.48% Expected volatility 55.70% 52.40% Expected dividend yield - -
The volatility assumption was estimated based on the price volatility of ordinary shares of comparable companies. The suboptimal exercise factor was estimated based on the vesting and contractual terms of the awards and management's expectation of exercise behavior of the grantees. The risk free rate was based on the US Treasury Bonds and other market information at the measurement dates.
Liabilities measured at fair value on a recurring basis as of December 31, 2013 are summarized below:
Quoted Prices in Active Markets for Significant Identical Other Observable Unobservable Assets (Level Inputs (Level Inputs (Level 1) 2) 3) US$ US$ US$ Share-based compensation liability - - 20 ============== ================= ==============
Liabilities measured at fair value on a recurring basis as of December 31, 2014 are summarized below:
Quoted Prices in Active Markets for Significant Identical Other Observable Unobservable Assets (Level Inputs (Level Inputs (Level 1) 2) 3) US$ US$ US$ Share-based compensation liability - - 7 ============== ================= ==============
The following table presents a reconciliation of share-based compensation liability measured at fair value on a recurring basis using significant unobservable inputs for the year ended December 31, 2014:
Share-based compensation liability -------------- US$ Balance as of December 31, 2013 20 Addition - Realized gains (13) -------------- Balance as of December 31, 2014 7 ==============
Realized gains of US$13 for the year ended December 31, 2014 were recorded in "changes in fair value of derivative financial liabilities" in the consolidated statements of comprehensive income.
No assets and liabilities were measured at fair value on a non-recurring basis as of December 31, 2013 and 2014.
21. SUBSEQUENT EVENT
In accordance with ASC topic 855 ("ASC 855"), Subsequent Events, the Group evaluated subsequent events through June 1, 2015, which was the date that the consolidated financial statements were issued. There were no significant subsequent events occurred between January 1, 2015 and June 1, 2015.
The following information does not form part of the Company's audited financial statements.
NON-GAAP FINANCIAL DATA
The Company defines adjusted financial data, a non-GAAP financial measure, as financial data excluding write-off of aborted U.S. initial public offering expenses, share-based compensation expenses and changes in fair value of derivative financial liabilities. The Company reviews adjusted financial data together with financial data to obtain a better understanding of the operating performance. The Company presents this non-GAAP financial measure to provide useful information to investors and other interested persons because by having access to such information they will have the same data which the Company uses to assess the operating performance, and because such information allows them to understand and evaluate the consolidated results of operations in the same manner as the management and to make period over period comparison of the financial results. However, the use of adjusted net income has material limitations as an analytical tool. One of the limitations of using non-GAAP adjusted net income is that it does not include all items that impact the net income for the period. In addition, because adjusted net income may not be calculated in the same manner by all companies, it may not be comparable to other similar titled measures used by other companies. In light of the foregoing limitations, you should not consider adjusted net income in isolation from or as an alternative to net income prepared in accordance with U.S. GAAP. The Company encourages investors and other interested persons to review our financial information in its entirety and not rely on a single financial measure.
(a).Non-GAAP Operating income and Non-GAAP Net income
Year ended December 31 ---------------------------------------- 2014 2013 ------------------ ------------------ US$ US$ Operating loss (7,819) (9,804) Add back: Share-based compensation expenses 479 761 Non-GAAP operating loss (7,340) (9,043) ================== ================== Net loss (7,442) (9,548) Add back: Share-based compensation expenses 479 761 Changes in fair value of derivative financial liabilities (13) (65) Non-GAAP net loss (6,976) (8,852) ================== ==================
(b) Non-GAAP basic and diluted earnings per share
Year ended December 31 -------------------------------------------- 2014 2013 --------------------- --------------------- US$ US$ Non-GAAP net loss (6,976) (8,852) Non-GAAP undistributed earnings (6,976) (8,852) Non-GAAP net loss attributable to ordinary shareholders used in calculating net income per ordinary share - basic and diluted (6,976) (8,852) ===================== ===================== Weighted average number of ordinary shares in computing: Earnings per share - basic 93,667,371 97,801,236 Earnings per share - diluted 93,667,371 97,801,236 Non-GAAP Earnings per share: Non-GAAP Earnings per share - basic (0.07) (0.09) ===================== ===================== Non-GAAP Earnings per share - diluted (0.07) (0.09) ===================== =====================
TOTAL SHARE-BASED COMPENSATION EXPENSES
Total share-based compensation expensesrelating to options and RUSs granted to employees, directors and external consultant recognized for the years ended December 31, 2014 and 2013 are as follows:
The years ended December 31, ------------------ 2014 2013 -------- -------- US$ US$ Cost of revenues 19 42 Selling and marketing expenses 265 329 General and administrative expenses 195 390 -------- -------- Total 479 761 ======== ========
Global Market Group Limited ("the Company") recognizes share-based compensation cost ratably for each vesting tranche from the service inception date to the end of the requisite service period. However, as the share options granted by the Company and Mr. Weijia (David Ling) Pan are subject to a performance vesting condition of the Company's initial public offering, no compensation cost has been recognized until after the completion of the admission of the Company's shares to the AIM Market ("Admission") in June 2012
This information is provided by RNS
The company news service from the London Stock Exchange
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